How Global Audit Firms Are Using Their Lobbying Clout to Dilute Sarbanes-Oxley Reforms

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Yves here. As this article indicates, Sarbanes-Oxley has done precious little to curb corporate bad behavior. In fairness, that is due in large measure to the SEC refusing to bring  Sarbanes-Oxley related cases, even though, as we argued at length, it was ideally suited to prosecuting crisis-related misconduct at large financial firms.

So Sarbanes-Oxely has been widely depicted as a corporate nuisance….but one that helps law and accounting firms to do some extra billed work. So why, pray tell, are the audit firms out to undermine it? It’s not the public company related provisions they are after, it’s the ones on their own industry. And their needs are pressing…

Originally published at Tax Justice Network

The dirty world of tax evasion and avoidance involves all sorts of unpleasant and anti-social characters, none more so than the professional enablers who devise avoidance schemes, market these schemes to their clients, lobby governments for special treatments and permissive laws, and generally play the role for tax dodgers that Tom Hagen played for The Godfather. Deloitte is one of these enablers, in fact one the global top 20, so it’s disturbing to read that according to this recent article by financial journalist Francine McKenna, Deloitte is taking the lead in lobbying for dilution of key parts of the US Sarbanes-Oxley Act (2002) relating to regulation of auditors.  According to McKenna:

 . . auditors and the AICPA, their trade association, (are) taking advantage of the “Trump” window to roll back Sarbanes-Oxley reforms. The industry is targeting the strict SOX auditor independence rules and the authority of the Public Company Accounting Oversight Board, the industry regulator established after Enron and its auditor, Arthur Andersen, collapsed.

The international accounting and audit industries have not exactly covered themselves in glory in recent decades.  Quite the opposite: audit failures have been rife and spectacular, not least the failure to spot the impending collapse of Lehman Bros and many other financial institutions that bellyed-up during the great financial crisis.  Our colleague Professor Prem Sikka has explored these failures at length here, here and here.  As McKenna notes, it was the behaviour of failed accounting giant Arthur Andersen, one of the then Big Five, which led to the inclusion in Sarbanes-Oxley of a prohibition on auditors from also offering consulting services:

Arthur Andersen’s focus on its lucrative consulting versus its audit of Enron was the catalyst for critics to succeed in getting prohibitions against consulting to audit clients into the Sarbanes-Oxley law. The service restrictions prohibit audit firms from providing non-audit services such as internal audit outsourcing services, financial information systems design and implementation, and bookkeeping to an audit client including company affiliates.

Sensible provisions, given the overlapping conflicts of interest that are rife in the financial services sector, though in practice they were largely ignored:

 . . however. The SEC and PCAOB rarely enforced any of the pre- or post- SOX auditor independence rules. Between 2002 and 2012, the SEC and PCAOB made only a handful of enforcement actions against the firms and they were minor. The enforcement actions related primarily to infractions that had occurred before the 2002 SOX service prohibitions were enacted.

So why are the Big 4 firms now engaging in extensive lobbying around The Hill in the hope that the Trump admininstration will go soft on financial regulation?  Well McKenna offers a clue:

In November of 2014, the International Consortium of Investigative Journalists (ICIJ) and its media partners released 28,000 Luxembourg tax-ruling documents prepared by PricewaterhouseCoopers for 340 corporate clients, including a very large number of PwC audit clients. PwC had sold, and client audit committees had approved, non-audit tax services for “transaction[s] initially recommended by the accountant, the sole business purpose of which may be tax avoidance and the tax treatment of which may be not supported in the Internal Revenue Code and related regulations.” That’s prohibited by the Sarbanes-Oxley Act of 2002.

Precisely.  The Big 4 firms are up to their necks in independence violations that haven’t yet been investigated by the regulators, and are keen to change the rules before the latter come knocking on their doors.

Knowing what we know about President Trump’s kow-towing to big business interests (see last week’s announcement on climate change, for example) we should expect the worst.  Read McKenna’s full article here, and weep.

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  1. Jesper

    They’re too big to fail so why do they worry?
    I sat next to an internal auditor and overheard how a credit analyst for an American bank asked a director if a written credit recommendation should be changed to match the directors decision. Yep, that bank had been a beneficiary of a government bailout….
    Auditors are trained at ‘Hear no evil, see no evil and speak no evil’, fail to learn those three rules and you’ll not make a lucrative career as an auditor. Learn that and kick down while making managers/executives look good and a lucrative career is guaranteed.
    Audits are almost worthless on a company larger than a small business but they do keep people busy. I suppose that is what it is all about.

    1. Disturbed Voter

      Who will guard the guards? In the absence of due diligence by investors … the attempt to cover their reckless gambling with the auditing prophylactic … will be an economic STD.

      If fiat money is fake, then it is Arthur Anderson all the way down.

  2. Independent Accountant

    Who will guard the guards guards? Specifically, what do you think the PCAOB will do about any Big 4 firm’s malfeasance? Nothing.
    The PCAOB will ban small firms from operating. Why? Why does the PCAOB even look at the 1,800 small firms which audit 1.5% by market cap of SEC registrants? The PCAOB is another makework operation.
    What would reduce the malfeasance you see?
    The US Treasury buying the underpriced intellectual property (IP) the Big 4 help create to draw taxable income from the US to lower-tax rate countries.
    If the Fortune 500 company refuses to sell at say 50% over whatever they claim the IP is worth, I say “indict ’em all” for tax evasion.
    Will this happen? Not likely as the Treasury employees are too busy looking for opportunities on the other side of the “revolving door”.

  3. Sluggeaux

    Thank you Yves — this is very important reporting. I recommend that readers follow the link to Francine McKenna’s reporting as well. The level of corruption that we have seen in the accounting field is breathtaking, and it comes as no surprise that they are going to use the “Trump window” to pay-off Congress-critters to remove even the weak-tea PCAOB rules.

    Conflicts of interest and self-dealing are the twin evils at the heart of Flexianism and the gig economy. Accountants and lawyers have come to see their careers as auditions with the entities they are supposed to be auditing. Enron and Lehman are only the most egregious examples of this — Ms. McKenna points to the collapse of Colonial Bank, who hired their Price Waterhouse Coopers auditor before his former colleagues “failed to detect” blatant fraud that brought down the $25 Billion enterprise.

    The Revolving Door must be destroyed. It has resulted in the U.S. having the most pervasively corrupt economic system of the modern age.

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